The rhetoric of the need for structural reforms to boost economic growth rings loudly across the globe, both in the developed world as well as emerging markets. But is structural reform really the most pressing solution to combat the current growth malaise which ails the global economy? Larry Summers, professor of economics at Harvard, makes a persuasive case (in the FT) for a more aggressive stimulus policy to boost global growth. To summarise:

-The dangers facing the global economy are the worst they have been at any time since the 2008 financial crisis. The risks of a vicious global cycle are real: where slow growth in the developed world negatively impacts emerging markets which export capital , thereby slowing growth in the developed world further and raising the risk of a negative global shock.

-Policymakers are vastly underestimating the risk of a global growth recession, which if were to occur, would be more difficult to reverse with further monetary stimulus as its impact will be limited in the developed world.

-Growth forecasts are being revised downwards everywhere; since 2012, the IMF has revised down its forecast for US GDP growth in 2020 by 6%, Europe by 3%, China by 14%, emerging markets by 10% and 6% for the world economy (see graph below). Furthermore, this gloomy scenario assumes no global recession.

-The world has entered into a new macroeconomic environment, where the risk of deflation is higher than the risk of inflation, and traditional tools to support growth may not be as effective. The risk of a recession today stunting future growth even more are high.

-Bond markets in the developed world are informing us that there is too little, not too much, government debt. While markets can be often wrong in their judgments about economic fundamentals, history also teaches us that policymakers who ignore market signals which are contrary to their preconceptions are liable to make serious errors.

-For example, an important lesson from the 2008 financial crisis was that ignoring signals from the pricing of mortgage securities regarding the health of the US housing market, and the prices of bank stocks regarding health of the financial system, led to a costly delay in dealing with the impending crisis. In Europe, ignoring signals from prices of Greek debt which implied a deep debt haircut, led to delays in making the necessary adjustments at a greater cost.

-The bond markets of the developed world are currently sending two strong signals: 1) inflation expectations for the foreseeable future are well below the 2% target, with the US at the highest level of 1.5% despite the market expecting a much lower interest rate over the next two years than what the Fed forecasts, 2) expectations of extraordinarily low real rates (averaging zero percent over the next 10 years) which have been declining for 25 years (see graph below).

-While there exists a possibility that QE might have depressed interest rates artificially, it is important to note that real rates are lower now than their average during QE, and forecasters have be wrong about expecting higher rates for years.

-The best explanation for this combination of slow growth, low inflation and zero real rates seems to be the secular stagnation hypothesis. This theory says that a combination of high rates of savings, lower investment and increased risk aversion depresses real rates which are consistent with full employment, resulting in the zero bound for nominal rates becoming a constraint.

-There are four reasons why normal real rates are lower: 1) increases in inequality with a larger share of income going to capital and corporate earnings raising savings levels, 2) lower expectations of growth due to a smaller labour force growth and low productivity levels reducing investment and raising savings, 3) increased frictions in financial intermediation caused by more regulation and higher uncertainty leading to lower investment, and, 4) reductions in the price of capital goods and in the quantity of physical capital – i.e. Facebook versus GM.

-Emerging markets have been (until recently) a bright spot in the global landscape and they have received significant capital flows from the developed world which could not be invested productively at home. These flows earned the developed world higher interest rates, raised export demand for their products and gave them more competitive exchange rates.

-Gross flows from the developed world to EMs rose from $240bn in 2002 to $1.1 trn in 20014, and with low rates in the developed world, foreign currency borrowing by the private sector in EMs rose from $ 1.7trn in 2008 to $4.3 trillion in 2015. However, this 30 year trend of increasing capital flows reversed for the first time (see graph below) with roughly $1 trn of private capital exiting EMs in 2015.

-The idea that the slowdown in growth is only a temporary response to the 2008 crisis is absurd – and recent data points to slowing growth in the US and continued slow growth in Europe and Japan.

-What is needed today is a global (and aggressive) approach equivalent to Mario Draghi’s famous (and highly effective) vow “the ECB will do whatever it takes to preserve the euro” – as a signal that authorities recognize the dangers of secular stagnation and will take bold steps to address it. In the US the Fed should only raise rates if there is a clear and present danger of rising inflation and a financial bubble, while Europe and Japan should recognize that their greatest risk is a further slowdown. Traditional QE is likely to have a limited stimulative effect, and further QE to both fund more fiscal expansion together with increased purchases of non-traditional assets (i.e. not only government bonds) is required.

-The case for further fiscal expansion is bolstered by the low level of rates, as the government can have higher deficits to meet debt-to-GDP ratio limits. For example, Europe’s 60% debt-to-GDP ratio criteria set when rates were 5%, can be much higher today with negative real rates. Fiscal spending on investment or maintenance, until demand grows again, would be an effective policy.

-Focusing primarily on structural reforms would imply ignoring the world’s markets which are signaling that we are in a different world today. Traditional responses of sound government finance , increasing supply potential and the avoidance of inflation would be a disastrous approach, particularly given that monetary policy tools are somewhat limited.

-If the idea of expansionary fiscal policy is wrong then the risks like higher inflation and overheating economies can be tackled by standard tried-and-tested approaches. However, if policy continues on the current fiscal tightening path (see graph above) , then the risk is that the global economy will fall into a Japan like trap where growth stagnates for an extended period and there is little scope for improvement.

-A very insightful and persuasively argued note which highlight the key challenge facing the global economy – weakening global demand. While aggressive monetary policies in recent years have managed to keep the global economy afloat, given the decline in their effectiveness going forward , the next phase of aggressive fiscal expansion is what is called for. It is somewhat absurd that the Yellen led Fed is thinking about a rate rise in this environment, and seems to have put itself in a corner by communicating a 2015 rate rise earlier in the year.

-Over the past month, fears of a hard landing in China seem have receded following aggressive fiscal and monetary easing policies to arrest the slowdown. Recent data on housing prices, FDI flows, bank loans and money supply indicates stabilizing growth in China, and as Byron Wien of Blackstone observes, this has been the key factor supporting the recent rally in the developed (and EM) world.

-As noted in recent newsletters, uncertainty regarding the Fed rate hike will continue to cause volatility in markets for a while longer, but stabilizing growth in China driven by aggressive fiscal and monetary easing, together with further easing policies by the ECB (i.e. increasing the amount of QE as well as lowering the negative deposit rate from -0.20% at the December 3 meeting) would make downturns buying opportunities, funded by raising cash on rallies (or future income).

-It is interesting to observe that the recent strong market rally was a phenomenal short squeeze as noted by Zero Hedge:

-“In the beginning of October, the NYSE short interest has risen to the highest level since July 2008”:

“Since then two things have happened: one after another central bank didintervene, leading to the biggest VIX monthly drop in history”:

“As the following chart below shows, with just two trading days left, October has posted thebiggest monthly point jump in S&P500 history”:

-So little wonder that hedge funds have performed so poorly (see graph below) since the onset of the financial crisis as markets have been driven by policy actions rather than fundamentals:

Source: Arbor Research

On Meat and Cancer Risk:

The recent report by the WHO linking eating red meat and processed meat with increased cancer risk has received a backlash from some nutritionists and the meat industry. David Katz, Director of the Yale University Preventive Research Centre provides a balanced analysis of the issue at hand (HuffPost, 10/27):

-“You have doubtless heard that the International Agency on Cancer Research, a subsidiary of the World Health Organization, has concluded that processed meats are carcinogenic, and red meat in general is probably so. Given the barrage of commentary, I will limit my own to a succinct list of implications. Here are my top 10 takeaways:

10) There isn’t cause to panic.

For those thinking, "I ate bacon once – I’m doomed!" – a moderating word of reassurance. The pig in question certainly is doomed, but you – not so much. Living involves inevitable exposure to carcinogens, sunlight among them. Exposure to a carcinogen does not mean cancer will happen.

9) The dose, as ever, makes the poison.

Serious researchers are now asking questions relating dose of meat intake, and duration, and when the cancer risk becomes meaningful. We may simply note that Paracelsus was right rather universally when noting that "the dose makes the poison." The contribution of meat of any kind to bad outcomes of any time relates not to isolated exposures, but to dose – a combination of quantity, frequency, and duration.

8) Meat isn’t what it used to be.

Those inclined to refute the IARC conclusion because we are constitutionally omnivorous as a species (we are) are ignoring two very important considerations. First, our Stone Age ancestors had a lifespan about half our own, so didn’t have time to develop cancer for the most part. What natural selection never sees, natural selection cannot address. Further, the meat of our native diets is rather far removed from the meats that prevail today, and in particular, processed meats.

7) Processed meat isn’t even what the meat that isn’t what it used to be…is.

Calling a food "cereal" may mean it is exclusively a whole grain (e.g., steel cut oats); or it may mean it is junk food with some variety of sugar its first ingredient. So, too, for meat. We may simply note that in our culture, it is customary to invoke some mantle such as the "Paleo diet," and then use it to justify eating meat our ancestors would never even have recognized as such.

6) The precautionary principle applies.

I have heard experts for the meat industry refuting the IARC report, saying we don’t know this for sure. Frankly, I’ll go with the international team of independent experts over the paid spokespeople every time, but either way: the precautionary principle pertains. That principle states that when risk is a possibility, presume it to be real until it can be disproven. Are parents really inclined to go with "IARC COULD be wrong, so have some more bacon…"? I hope not.

5) More X, less Y.

Diets high in fruits and vegetables are consistently associated with less chronic disease, cancer included. When discussing dietary cause and effect, we tend to overlook the fact that a higher percentage of our calories from X means, inevitably, a lower percentage from Y. Eating more meat, as a percent of total calories, means eating fewer plant foods, which actually fight cancer. Thus, the harms of meat are not necessarily limited to the meats one adds to one’s diet; they extend to what meat subtracts from the diet.

4) We had other good reasons to eat less meat: biodiversity.Experts in biodiversity — our planet’s luminous distinction — espouse the view that one of the best ways for us to protect that treasure is for the massive, global horde of Homo sapiens to eat less meat.

3) We had other good reasons to eat less meat: water and climate.

Ditto, essentially, for responsible stewardship of accessible water and the global climate.

2) We had other good reasons to eat less meat: ethics.

Much of the meat on modern menus comes to us from animals subject to various forms of abuse and cruelty. If we are decent, cruelty to other creatures has no place on any menu.

My initial reaction to the new report was along the lines of: so? We have overwhelming evidence born of both research and real-world observation that plant-predominant diets are associated with longevity and vitality and lesser rates of all chronic disease, including cancer. Since this same shift in our dietary patterns would be better for us and the planet, did we really need another reason? In other words: even before the new report from IARC, we knew what we should be eating; we just keep finding reasons not to swallow it. That’s what needs to change.

-One final thought. The advocates of "more meat" mostly depend on the contention that our health did not improve when we "cut fat" beginning decades ago. As artfully addressed in a recent study, that’s because we replaced one way of eating badly with another. We should, indeed, eat less meat — but only Big Food will profit, and our health not at all, if processed meat calories are replaced with junk food. The 2015 Dietary Guidelines Advisory Committee recommended neither processed meat, nor cotton candy; they pretty much nailed it.

-So, to the extent this new report continues to hammer away at a message we had, essentially, already received – may it help drive the final nail into the coffin of fixating on only one food or nutrient at a time, ignoring the big picture, and inventing new ways to eat badly. Yes, processed meat is bad for us. So are dogma, perennial discord, and cultural dysfunction.

Here’s to the simple mantra for a healthy diet and therefore a healthy life: “eat whole food, a bit less, mostly plants”. It needn’t be more complicated!